Why You Should Buy This Market

Before we tackle yesterday’s market action, a quick visit back in time to yesterday’s Money Morning article. We posted the article on our sibling website, Daily Reckoning, and it’s attracted some reader feedback.

There’s discussion over whether your editor has hit the mark or missed it by a country mile. Our point is that whenever you have government interfering in the market it creates distortions – all of which lead to negative consequences which leads to further distortions.

In our mind, there is little or no difference between the government enticing first homebuyers to buy a house with the help of ‘free’ money, and businesses being given a tax incentive to invest now rather than later.

In both cases it distorts the market and only succeeds in driving up costs as demand artificially rises in the short term. Longer term this is harmful as it creates false signals in the market and potentially encourages businesses to invest when longer term demand isn’t really there.

But anyway, back to today. A 3% drop on the S&P/ASX200 can’t be ignored. Something else that can’t be ignored is the results from the ASX ‘2008 Australian Share Ownership Study.‘

According to the study, “approximately 6.7 million people, or 41% of the adult Australian population, own shares. This is down from 46% two years previously.”

The drop from 2004 is even greater. Five years ago 55% of the adult Australian population owned shares in some form or another, whether it was directly or indirectly – for example, through a managed fund.

Here’s how the breakdown looks…

Source: ASX

There’s probably several ways you can look at these numbers, but the obvious one is that the proportion of investors that invest in shares only, has remained steady during the last four years.

And if you take the raw numbers, the number of direct shareholders has actually increased by nearly 30%…

The ASX study says:

“The decline in ownership came from the group of investors who own both direct share investments and managed funds. Although we cannot say with certainty, the data suggests these investors reduced their holdings in both shares and managed investments… Investors with dual holdings (direct and indirect) tended to come from the professional, university-educated sector, rely on ‘experts’ and have links to financial planners. They were less likely to be self-directed investors. It is, therefore, more likely that their decision was based upon professional advice.”

We’re not so sure about that. That may be the case for investors that pay a broker based on transaction fees, ie. Brokerage. But we seriously doubt that’s true for investors who pay their broker based on the portfolio value.

Our guess is investors are taking a greater interest in their own investments and acting for themselves. And why wouldn’t you when you can sell shares for as little as $20 with most online brokers.

Compared to continuing to pay a 2% management fee on a declining asset value.

The stats also show you something else. Or rather they infer something else. That is uninformed retail investors tend to flock into the market near the peak and exit the market near the bottom.

Now that’s not new news but it does help to reinforce what has been common knowledge for years.

The table above shows almost a 50% increase in direct share ownership between 1999 and 2000, just as the dot-com boom was about to kaboom.

And although the increase between 2006 and 2008 isn’t quite as big, anecdotal evidence suggests that large numbers of new investors swarming into the market as it reached the peak only to hold on as their blue-chip portfolio hit the skids.

The odds are when the ASX completes its next survey the number of investors holding shares in 2010 will share a big decrease compared to 2008s number.

That’s why I still strongly believe that yesterday’s 3% drop provides you with the “buy on market weakness” opportunity that I’ve written to Australian Small Cap Investigator subscribers about before.

And I don’t just mean for small caps either. Short term drops for income producing stocks presents a good opportunity to pick the stock up a bit cheaper and therefore increases your income yield.

Of course, that doesn’t help if you already own it. But if you’re investing primarily for income the shorter term movements should have less impact on you, providing the stock keeps paying out the dividend.

That’s something I’ll concentrate on when the new income service is launched.

[Ed note: I promised to keep you informed about the release of the new income investing newsletter. Well, the launch is almost upon us. You'll receive special details in your inbox in the next few weeks... so keep a look out for it!]

Other Stuff on the Markets

The S&P/ASX200 fell by 3.1% yesterday, while there was slightly better news overnight on Wall Street with the Dow Jones Industrial Average falling by just 16 points. In Europe the FTSE100 fell 0.1%, and France’s CAC40 fell by 0.21%.

The price of gold in Australian dollars is trading at $1,169.33, while in US Dollars it trading at $926.90.

The Aussie dollar strengthened versus the US dollar and Japanese Yen, trading at USD$0.7934, and JPY75.55.

Crude oil closed overnight at USD$68.51.

For the biggest movers on the market yesterday click here…

And today on the economic calendar we have the meeting of the Federal Open Market Committee (FOMC) in the US.

Cheers.

Kris.